An Examination of the Logistics Leverage Process: Implications for Marketing Strategy and Competitive Advantage

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1 University of Tennessee, Knoxville Trace: Tennessee Research and Creative Exchange Doctoral Dissertations Graduate School An Examination of the Logistics Leverage Process: Implications for Marketing Strategy and Competitive Advantage Lisa Michelle Bobbitt University of Tennessee, Knoxville Recommended Citation Bobbitt, Lisa Michelle, "An Examination of the Logistics Leverage Process: Implications for Marketing Strategy and Competitive Advantage. " PhD diss., University of Tennessee, This Dissertation is brought to you for free and open access by the Graduate School at Trace: Tennessee Research and Creative Exchange. It has been accepted for inclusion in Doctoral Dissertations by an authorized administrator of Trace: Tennessee Research and Creative Exchange. For more information, please contact

2 To the Graduate Council: I am submitting herewith a dissertation written by Lisa Michelle Bobbitt entitled "An Examination of the Logistics Leverage Process: Implications for Marketing Strategy and Competitive Advantage." I have examined the final electronic copy of this dissertation for form and content and recommend that it be accepted in partial fulfillment of the requirements for the degree of Doctor of Philosophy, with a major in Business Administration. We have read this dissertation and recommend its acceptance: Mary Holcomb, Ernest Cadotte, Robert T. Ladd (Original signatures are on file with official student records.) John T. Mentzer, Major Professor Accepted for the Council: Carolyn R. Hodges Vice Provost and Dean of the Graduate School

3 To the Graduate Council: I am submitting herewith a dissertation written by Lisa Michelle Bobbitt entitled An Examination of the Logistics Leverage Process: Implications for Marketing Strategy and Competitive Advantage. I have examined the final electronic copy of this dissertation for form and content and recommend that it be accepted for partial fulfillment of the requirements for the degree of Doctor of Philosophy, with a major in Business Administration. John T. Mentzer Major Professor We have read this dissertation and recommend its acceptance. Mary Holcomb Ernest Cadotte Robert T. Ladd Acceptance for the Council: Anne Mayhew Vice Provost and Dean of Graduate Studies (Original signatures are on file with official student records.)

4 AN EXAMINATION OF THE LOGISTICS LEVERAGE PROCESS: IMPLICATIONS FOR MARKETING STRATEGY AND COMPETITIVE ADVANTAGE A Dissertation Presented for Doctor of Philosophy Degree The University of Tennessee, Knoxville Lisa Michelle Bobbitt December 2004

5 Copyright 2004 by Lisa Michelle Bobbitt All rights reserved. ii

6 DEDICATION This dissertation is dedicated to my mother, Opal Kittrell, and to the memory of my father, Thomas Kittrell. iii

7 ACKNOWLEDGEMENTS There are many people who have had an impact on the dissertation process and to whom I am grateful. First, I would like to thank the faculty and staff in the Department of Marketing and Logistics at the University of Tennessee for their knowledge, support, and involvement with the Ph.D. students in the program. In particular, I would like to thank the dissertation committee chaired by Dr. John T. Mentzer, and including Dr. Mary Holcomb, Dr. Ernie Caddotte, and Dr. Tom Ladd. I appreciate the guidance they provided throughout the entire process and the unique strengths of each member which ensured the development of a theoretically and methodologically sound dissertation. I would also like to acknowledge Dr. Pratibha Dabholkar who, through various research projects, was instrumental in the development of my research skills. I would like to recognize Dr. Ron Moser at Middle Tennessee State University and Dr. John Parnell at the University of North Carolina at Pembroke for encouraging me to pursue this career path. I am forever grateful for their confidence in my abilities and for providing opportunities that would prepare me for a life in academia. To my colleagues in the Ph.D. program, I am fortunate to have gone through the process with such a supportive network of friends who made the adventure all the more enjoyable. I would like to thank Geoff Stewart who always helped me see things from a different perspective and who has seen me through since the initial GTA meeting. My greatest source of strength throughout the process has been my friends and family. I would like to thank Katie and Laurie for their friendship and for the periodic reality checks (GRD). I am especially grateful to my husband, Stan, who has supported me throughout the program with his love, words of encouragement, and willingness to iv

8 help with any aspect of the dissertation. Finally, I would like to acknowledge my mother, Opal Kittrell, who has always inspired me by what she has accomplished in life both personally and professionally. She has always believed I could accomplish anything I put my mind to and that belief has sustained me. Finally, I am grateful to the Graduate School at the University of Tennessee for the Yates Fellowship Grant that provided funding for the dissertation. v

9 ABSTRACT Based on preliminary research on logistics leverage and the lack of research on linking specific logistics capabilities and competitive advantage, it was the primary purpose of this dissertation to develop and test a theoretical model of the logistics leverage process. The model was developed based on the extant literature in logistics, marketing, and strategic management and the data from in-depth interviews with logistics professionals. The nomological network consisted of eight constructs: resource commitment, process capabilities, value-added service capabilities, relational capabilities, logistics performance, competitive advantage, firm performance, and marketing signals of value. Resource commitment and logistics performance were tested as second-order constructs in the model. The survey method was utilized to obtain data on the eight constructs in order to test the hypothesized relationships among the constructs. Logistics professionals in manufacturing organizations were selected as target respondents based on their perceived knowledge on the constructs of interest. The recommended two-step approach was used to analyze the measurement and structural models in structural equation modeling and to test the hypotheses. Four of the nine hypothesized relationships were supported and the overall fit of the structural model was supported by the goodness of fit measures. The findings of this research provide both theoretical and managerial implications. vi

10 TABLE OF CONTENTS CHAPTER 1 - INTRODUCTION...1 THEORETICAL JUSTIFICATION... 3 Competitive Advantage... 3 Resource-Based Theory of the Firm... 5 Role of Logistics in the Firm... 8 Logistics and Marketing Integration Logistics Leverage THEORETICAL MODEL OF LOGISTICS LEVERAGE STATEMENT OF PURPOSE POTENTIAL CONTRIBUTIONS OF THIS RESEARCH ORGANIZATION OF THE DISSERTATION CHAPTER 2 THEORY DEVELOPMENT...24 QUALITATIVE INVESTIGATION Data Collection Data Analysis FACILITATORS OF LOGISTICS LEVERAGE Firm Resources Resource Commitment Capabilities Logistics Performance Marketing Signals of Value OUTCOMES OF LOGISTICS LEVERAGE Competitive Advantage and Firm Performance SUMMARY CHAPTER 3 - RESEARCH METHODOLOGY...56 STRUCTURAL EQUATION MODEL RESEARCH DESIGN Sampling Plan Data Collection Process MEASUREMENT DEVELOPMENT Construct Operationalization PRE-TEST DATA ANALYSES Data Integrity Sample Characteristics Missing Data Analysis Scale Purification METHOD OF ANALYSIS SUMMARY vii

11 CHAPTER 4 - FINDINGS AND ANALYSES...82 DATA EXAMINATION Response Rate Missing Data Demographic Characteristics Descriptive Statistics SCALE CONFIRMATION Unidimensionality Convergent Validity Discriminant Validity STRUCTURAL MODEL ANALYSIS Structural Model Hypotheses Tests CHAPTER SUMMARY CHAPTER 5 - CONCLUSIONS AND IMPLICATIONS DISCUSSION OF FINDINGS Hypothesis Hypotheses 2 & Hypothesis Hypothesis Hypotheses 6, 7 & Hypothesis LIMITATIONS THEORETICAL CONTRIBUTIONS MANAGERIAL CONTRIBUTIONS FUTURE RESEARCH OPPORTUNITIES CONCLUDING REMARKS REFERENCES APPENDICES APPENDIX A: QUALITATIVE INTERVIEW PROTOCOL APPENDIX B: PRETEST SURVEY DOCUMENTS APPENDIX C: CONSTRUCT MEASUREMENT APPENDIX D: PRETEST RESULTS APPENDIX E: FINAL STUDY DOCUMENTS APPENDIX F: FINAL STUDY DESCRIPTIVE STATISTICS APPENDIX G: FINAL STUDY FACTOR ANALYSIS APPENDIX H: FINAL STUDY SEM RESULTS VITA viii

12 LIST OF TABLES Table 3-1: Summary of Scale Reliability Results Table 4-1: Direct Structural Model Correlations of Exogenous Variables Table 4-2: Measurement Model Comparisons Table 4-3: Logistics Performance Model Comparisons Table 4-4: Structural Equation Model Fit Measures ix

13 LIST OF FIGURES Figure 1-1: Drivers, Facilitators, and Outcomes of Logistics Leverage Figure 1-2: A Process Model of Logistics Leverage Figure 2-1: The Logistics Leverage Conceptual Model Figure 3-1: Logistics Leverage Structural Equation Model Figure 4-1: Model I Direct Model Figure 4-2: Model II Complete Mediation Model Figure 4-3: Model III Saturated Model x

14 CHAPTER 1 - INTRODUCTION Companies today are facing a great variety of internal and external challenges as they attempt to remain profitable and stay ahead of the competition. Externally, they are faced with opportunities and threats presented by increasing domestic and global competition, more informed and demanding customers, and rapid advances in technology. Internally, they are confronted with greater pressure to become more efficient through the reduction of costs while simultaneously becoming more effective through the improved deliverance of customer service as well as the creation of customer value. As a result of these challenges, companies are finding it more difficult to compete with and stay ahead of the competition for any length of time. Companies that have traditionally competed on the marketing elements of product, price, or promotion may find it difficult, in today s marketing environment, to differentiate their offerings from competitors in the minds of their customers. Competitors can easily take away any advantage that may have been initially gained through product innovations, pricing cuts, or promotional endeavors. Consequently, companies are forced to find new ways to compete in the marketplace. Academics and practitioners alike are interested in determining how a company can create and sustain a competitive advantage. Therefore, the main research issues are, 1) How can a firm achieve a competitive advantage? 2) How can a firm determine if it has obtained a competitive advantage? In addressing the first question, logistics has been suggested as a means of developing a differential advantage when companies have similar product offerings (Mentzer and Williams 2001). Since the area of logistics incorporates many activities 1

15 such as inventory management, order processing, transportation, and warehousing that are managed in an integrated fashion, the unique aspects that lead to improved performance are harder to isolate and identify. In addition, the increasing focus on potential benefits accruing from supply chain relationships has also added a degree of complexity to logistics management. As companies become more logistically integrated internally and externally, it may be more difficult for competitors to duplicate the benefits that arise from such integration. As a result, the role of logistics within the firm has taken on greater strategic importance. The second question has primarily been the focus of the strategic management literature. Studies have examined how various resources or capabilities of the organization can be used to create a sustainable competitive advantage. While researchers have attempted to measure competitive advantage, there is no consensus on a set of measures to use. In addition, studies often focus on one or two specific resources without considering how the resources are related or how other resources may affect the attainment of competitive advantage. The remainder of this chapter presents background information on the theory of competitive advantage and the resource-based theory of the firm as antecedent justification for viewing logistics as a competitive weapon of the firm. In addition, the logistics leverage process is introduced as a means of obtaining competitive advantage through logistics. Based on the preceding discussion, research questions and objectives for this dissertation are presented. The chapter concludes with a summary of the remaining chapters of the dissertation. 2

16 THEORETICAL JUSTIFICATION The subjects of competitive advantage (Porter 1985) and the resource-based theory of the firm (Barney 1991; Rumelt 1984; Penrose 1959) have both received a considerable amount of attention in the strategy literature. Researchers in other disciplines, such as logistics and marketing, have also recognized the applicability of these subjects to their areas (Day 1988; McGinnis and Kohn 1990; Stock 1990). Traditionally, these two subjects have been examined independently of one another as the competitive advantage literature has focused more on favorable environmental conditions in the creation of competitive advantage, while the resource-based view of the firm has taken an internal focus in identifying the unique resources that can give a firm an advantage in the marketplace. Competitive Advantage Most of the research in the competitive advantage literature has focused on identifying the sources of competitive advantage and how it can be sustained over time (Hall 1993; Hitt and Ireland 1985). Porter (1985) states that competitive advantage is the result of a firm creating value for its buyers that exceeds the costs associated with creating the value. There are many different ways a firm can create the type of value identified by Porter (1985). The manufacturing, marketing, or distribution activities of the firm can all be used to construct value. However, firms have to be aware of what products/services, activities, and/or processes are valued by the customer. 3

17 Research has identified several ways in which a firm can achieve a competitive advantage. Porter (1985) identified cost leadership and differentiation as the two primary methods. To achieve a cost advantage, companies have to understand the underlying cost structure of their activities and how the interrelationships among activities affect costs. Functional areas within the firm that share activities or knowledge can realize lower costs if the activities are similar or the knowledge is significant to minimize or eliminate inefficiencies. Similarly, Porter (1985) indicated coordination of activities across companies could impact costs. Linking activities among members of the supply chain can reduce costs, but they can also increase costs. Therefore, companies should approach the identification of areas to be integrated from a strategic perspective, which can distinguish the benefits versus the costs of various activities to be coordinated. To achieve a competitive advantage based on differentiation, companies have to understand the potential sources of differentiation. Examples include the physical product, marketing activities, distribution activities, and human resources. Porter (1985) defines differentiation as, providing something unique that is valuable to buyers beyond simply offering a low price. The key is customers have to perceive the offering as providing value greater than what could be obtained from other firms. While it is important to understand what can lead a firm to obtain a competitive advantage, it is also imperative to identify how a competitive advantage can be maintained over time. To achieve a sustainable competitive advantage, the strategy implemented must not only provide value to buyers, but also prevent imitation by competitors (Porter 1985). Barney (1991) suggests it is not the amount of calendar time that determines whether a firm has a sustainable competitive advantage, but rather 4

18 the inability of competitors, both current and potential, to duplicate that strategy. For example, the degree to which differentiation results in sustainable competitive advantage depends on whether buyers continue to perceive value in the form of differentiation and whether it can be easily imitated by competitors (Day 1988; Porter 1985). Researchers, such as Porter (1985; 1980), were initially concerned with how external environmental factors influence conditions of competitive advantage within a particular industry. For example, the five forces model developed by Porter (1980) suggests firms in industries characterized by high entry barriers will have greater opportunities to achieve high levels of firm performance. The assumptions inherent in the industry focus are that firms are identical in terms of resources and strategies and any resource heterogeneity that exists within the industry will be transitory due to the ability of others to acquire the resource (Barney 1986; Rumelt 1984; Porter 1980). However, others have suggested resource heterogeneity can be a source of competitive advantage based on the resource-based view of the firm (Penrose 1959; Rumelt 1984; Barney 1991). In fact, it has been suggested that competitive advantage can only be achieved when resources are combined in such a way that they create a unique capability that is valued by customers (Morgan and Hunt 1999). Resource-Based Theory of the Firm The analysis of the firm as a collection of productive resources was first proposed by Penrose (1959), and serves as the foundation for the resource-based theory of the firm. Essentially, this theory implies a firm possesses specialized assets, skills, or 5

19 resources that can be utilized to improve firm performance and to create a competitive advantage. Penrose (1959) suggested the level of rents achieved by an organization is based on how it takes advantage of its core competencies to utilize its resources. Rents are the result of accumulating and utilizing heterogeneous resources that are better than those of the competition. A resource can be thought of generally as a strength or weakness of the firm or, more specifically, as the tangible and intangible assets that are associated with the firm (Wernerfelt 1984). Tangible resources include physical resources, such as facilities, transportation equipment, or production equipment. Improvements in tangible resources may lead to lower costs, and thus, improved performance. However, it has been suggested that tangible resources cannot serve as a source of sustainable advantage since others can purchase them in the market (Dierickx and Cool 1989). As a result, intangible resources such as corporate culture, knowledge, distribution control, relationships, and customer loyalty have received more attention in the resource-based literature (Itami and Roehl 1987; Winter 1987). Intangible resources have been classified as both assets (e.g., trademarks, data bases) and competencies (e.g., knowledge, skills) (Hall 1993), and are the major source of firm heterogeneity (Mahoney 1995). Not all firm resources may lead to a sustainable competitive advantage. Researchers have investigated the link between the resources of the firm and sustainable competitive advantage (Rumelt 1984; Lippman and Rumelt 1982) and found a resource needs to possess certain attributes in order to lead to a sustainable competitive advantage. Resources should be valuable, rare, imperfectly imitable, and imperfectly substitutable (Barney 1991; Lippman and Rumelt 1982). A resource creates value if it can enable a 6

20 firm to improve performance through the implementation of a particular strategy. Valuable resources enable a firm to take advantage of opportunities and minimize threats in the environment, which should lead to improved performance (Barney 1991). The resource must not only be valuable, but also rare in that not all competitors within an industry possess the resource. If competitors do possess common resources, those resources cannot be used to gain a competitive advantage since each of the competitors can implement a common strategy based on the resources. For a resource to be imperfectly imitable, it must be causally ambiguous (Barney 1986; Lippman and Rumelt 1982; Rumelt 1984). For example, the resource must be difficult for competitors to understand exactly how a firm achieves its benefits from the resource. Causal ambiguity has been identified as a source of isolating mechanisms and firm heterogeneity and is most likely to be created by intangible assets (Itami and Roehl 1987; Hall 1992). The final requirement for a resource to contribute to the creation of competitive advantage is other resources must not be equally as valuable from a strategic perspective. It must not be possible for another firm to use some other resource to implement the same strategy to achieve the same benefits. If two different resources used by two different companies are strategically equivalent, then neither company will have a competitive advantage. How resources of the firm are converted into a sustainable competitive advantage has commonly been thought to depend upon the competitive situation of the industry (Seth and Thomas 1994). However, the resource-based view may be able to explain differences in firm profitability that cannot be attributed to industrial differences (Peteraf 7

21 1993). Day and Wensley (1988) indicated that firms have to identify the skills and resources that exert the most leverage on positional advantages and future performance and then allocate resources toward those high leverage sources in order to get the greatest performance improvement at the least cost. Positional advantages refer to the ability of the firm to provide superior customer value or to achieve low costs relative to competitors (Day and Wensley 1988). As a result of achieving positional superiority, the firm should be able to realize greater performance in terms of profitability or market share. However, there is a lack of research on how to convert positional advantages into superior performance outcomes. Research on how to identify distinctive capabilities and how positional advantages are linked to particular capabilities has been called for in the literature (Day 1994). Role of Logistics in the Firm The view of logistics within the organization has evolved over the past 30 years from a cost center and revenue generator to a core competency and differentiator for the firm (Langley 1986). It has predominantly been viewed as a cost center, and the focus has been on how to reduce costs associated with the activities of inventory management, warehousing, transportation, materials handling, and order processing. However, it has also been recognized that firms should not consider logistics simply from a cost perspective, but should also recognize the revenue generating capabilities of the area (Christopher 1986). By focusing only on costs in logistics, managers may fail to recognize the impact of cost reductions on customer service levels. Companies that 8

22 attempt to improve logistics processes may improve customer service. The revenue generated from better customer service may offset any costs incurred as a result of improving logistics processes. Of course, managers need to have a good understanding of the customer service levels desired by customers. Logistics is increasingly viewed as a core competency of the firm. Firms are recognizing the strategic importance of logistics just as they have manufacturing and marketing. While marketing has long played a role in the strategic decisions of the firm, logistics has only recently been recognized in terms of its value at the strategic level. As Bartels indicated back in 1976, distribution is becoming an increasingly important aspect of the strategic plans of marketing-oriented companies. Hutt (1995) also indicated many organizations are recognizing that various functional areas participate to differing degrees in the design, development, and implementation of strategy. How logistics is considered within the organization has evolved from an operational perspective to a tactical perspective to a strategic perspective (La Londe 1990). Fuller et al (1993) stated, logistics has the potential to become the next governing element of strategy as an inventive way of creating value for customers and as an immediate source of savings. Cooper, Innis, and Dickson (1992) indicated that organizational structure and management style indicate how logistics fits into corporate strategy. Similarly, Sharma et al (1995) developed a framework that examines the impact of a firm s logistics policy on customer satisfaction, profitability, and strategic planning. As a competence, logistics can be used to create superior service or value to customers. Finally, logistics is also viewed as a resource that can differentiate the firm in the marketplace. According to the resource-based view of the firm, the way to achieve a 9

23 sustainable competitive advantage is through the implementation of strategy based on the firm s unique resources. Essentially, resources should determine a firm s strategy (Mahoney 1995). Coyne (1986) indicated that companies can develop different types of capability differentials as sources of sustainable competitive advantage. For example, if a firm has the appropriate knowledge and skills in the logistics area, it can develop the functional capability to do specific things through logistics to gain a competitive advantage. Similarly, if an organization can improve its logistics performance through integrated decision-making, it may be able to provide a higher level of customer service and create value for its customers. A study by Sterling and Lambert (1987) revealed that physical distribution/customer service could provide firms with an opportunity to gain a competitive advantage in the market place. Imitating logistics activities is somewhat more difficult due to the interdependence and integration of several processes within the company and often across companies. While the potential for an organization to differentiate itself through its logistics capabilities alone may exist, the importance of integrating logistics capabilities with other areas of the firm should not be ignored. It has become necessary to integrate business processes and recognize that horizontal decision-making across functional boundaries is essential to organizational performance (Smart 1995). Driven by needs to reduce costs and improve customer service, many companies pursuing a market orientation are discarding their traditional organizational structures. Often functional units within an organization develop their plans in isolation without knowledge or consideration of the plans being developed by other functional areas. However, each functional area needs to 10

24 understand the impact it can have on other areas, the decision-making process of the firm, and the market response to the firm s product/service offering (Lim and Reid 1992). Traditionally, the provision of customer service, and more recently the creation of customer value, has been viewed as the responsibility of the marketing area within the organization. However, it has been recognized in the literature that customer service should be the responsibility of the entire firm, not just one area (Barwise 1995; Webster 1988; Christopher 1973). Similarly, the firm should be viewed as a collection of activities that are aimed at providing value to its customers (Porter 1985). Barwise (1995) suggested this is particularly important if organizations have adopted a market orientation. Marketing can no longer be the sole responsibility of a few specialists. Everyone in the firm must be charged with responsibility for understanding customers and contributing to developing and delivering value for them (Webster 1988). Some organizations, though, fail to implement cross-functional management even though they are aware of the value that can be created (Ames and Hlavacek 1989). While there is a considerable amount of literature on the subject of interfunctional relationships, some areas of the organization have received more attention than others. For example, marketing s relationship with areas such as manufacturing and research and development has received quite a bit of attention in the literature (Song et al 1996; Ruekert and Walker 1987; La Londe 1990; Gupta et al 1986). Rinehart, Cooper, and Wagenheim (1989) indicated that marketing and logistics activities should be the focus of integration within a firm since they are the primary functions that interface with the customer. Three of the marketing mix elements (product, price, and promotion) are dependent on the cost of making the product available to the customer (Voorhees and 11

25 Coppett 1986). Essentially, companies must consider all of the interfaces where customer contact can be enhanced by service and consider all of the costs and benefits received from such service offerings. The logistics service package should be considered a marketing tool and subjected to the same cost-effective scrutiny as any other marketing expenditure (Christopher 1973). Logistics and Marketing Integration The marketing and logistics areas, especially marketing s role in the distribution process, should be integrated in order to enable companies to successfully cope with future strategic problems (Schneider 1985). Research has addressed the importance of a logistics-marketing relationship from a strategic perspective. In considering the impact of integration of logistics and marketing on strategy, three levels of decision-making (strategic, tactical, and operational) within an organization should be considered (Christopher 1973). These levels are interdependent and decisions in one area impact decisions and performance of other areas. If the company does not consider itself as a total system, but rather as separate functional silos, then total performance will be diminished. To change to an integrated, process-oriented organization, Fawcett and Fawcett (1995) suggested change has to begin with top management and the strategic planning process. Strategic planning can be defined as, the process of identifying the long-term goals of the entity and the broad steps necessary to achieve these goals over a long term horizon, incorporating the concerns and future expectations of the major stakeholders (Cooper et al 1992). 12

26 Remmel (1991) presented a framework for integrating the concepts of marketing and logistics to create a competitive strategy. The steps of the strategy are to: (1) investigate customer wants; (2) assess logistics and marketing performance; (3) assess competitors performance; (4) develop an integrated strategy; and, (5) implement the strategy. The fourth and fifth steps focus on the integration of logistics and marketing to satisfy customer requirements. Porter (1980) stated, the fundamental basis of above average performance in the long run is sustainable competitive advantage. The marketing manager can succeed in achieving above average performance in the marketplace by developing a competitive advantage for the product/service offered to the consumer. Competitive advantage is often derived by taking into account the expected utilities or benefits associated with the product (Barry 1980). Once again, this can be accomplished through the addition of a service component - service components that fall within the boundaries of logistics such as timeliness of delivery and delivery reliability. By recognizing the potential benefits of integrating logistics and marketing decisions, organizations may be able to achieve logistics leverage. This may provide them with a competitive advantage, especially if competitors are not integrating their functional activities. Logistics Leverage The literature presented in the areas of competitive advantage, the resource-based theory of the firm, and the strategic importance of the integration of the logistics and marketing areas culminates into the idea of logistics leverage. Bowersox, Mentzer, and 13

27 Speh (1995) first introduced the concept and defined it as the ability to effectively influence market demand through the application of excellent logistics systems, techniques, and programs. They indicated that it is not only becoming necessary for companies to develop logistics superiority, but also to strategically integrate logistics and marketing to create a competitive advantage. By doing so, firms may be able to more effectively implement marketing strategies as well as recognize improvements in sales, market share, and customer satisfaction. To influence market demand or to create a competitive advantage, the logistics superiority of the firm has to be valued by its customers. To create value, the logistics processes of the firm have to provide customers with the opportunities to improve performance, reduce costs, and/or improve customer service. Mentzer and Williams (2001) extended the logistics leverage concept to include such a focus. Through the extant literature and case studies, they developed a revised definition of logistics leverage as, the achievement of excellent and superior, infrastructure-based logistics performance, which - when implemented through a successful marketing strategy - creates recognizable value for customers. The definition suggests it is not sufficient to simply develop excellent and superior logistics performance to create customer value. This capability has to be communicated to customers in such a way that they recognize the value that can be received by working with a company that possesses such a capability. In trying to achieve logistics leverage, a company must strive to create and maintain logistics service that is superior to its competitors service offerings in providing value to customers. 14

28 The Mentzer and Williams (2001) conceptualization of logistics leverage recognizes that factors such as technology, people, facilities, and strategic relationships provide the infrastructure to create logistics leverage. Through the development of these infrastructure components, companies should be able to achieve improved company performance through reduced costs and improved customer satisfaction. In addition, it is recognized that to achieve logistics leverage, coordination between the marketing and logistics areas of the firm has to occur. Only one study has empirically examined the concept of logistics leverage. Kent (1996) examined the coordination of the information technology and logistics areas of the firm and the resulting impact on performance. The logistics leverage concept was extended to what is referred to as Leverage 2. Leverage 2 is defined as, the maximization of customer value, process efficiency, and differential advantage through the interfunctional coordination between logistics and information technology (Kent 1996). This definition extended the one developed by Bowersox, Mentzer, and Speh (1995) in two ways. First, there is the recognition that decisions in logistics and information technology are interrelated; thus, there should be interfunctional coordination between the two areas. Second, logistics leverage can do more than stimulate temporary demand for a company s product/services. By creating customer value, companies may be able to develop customer loyalty and ensure sales and profitability in the long run. In addition, competitors may not be able to imitate the logistics service, which creates differential advantage. Using in-depth interviews, Kent (1996) found some support for improved internal efficiencies through the coordination of information technology and logistics. 15

29 Achieving superior logistics performance can result in many benefits to customers. The benefits may include improved satisfaction with the company s products/services and overall improved customer value. These benefits are the result of improved customer service and reduced costs, which may be realized as a result of logistics leverage. La Londe, Cooper, and Noordewier (1988) defined customer service as, a process for providing significant value-added benefits to the supply chain in a costeffective way. Logistics plays an important role in the creation of customer service. In addition to the benefits received by consumers, there are also benefits to the company. Mentzer and Williams (2001) identified reduced operating costs, improved market share, and improved profitability as potential outcomes of achieving logistics leverage. Another potential outcome as a result of improved service and reduced costs may be customer loyalty. If customers are consistently provided with desired levels of service, they may develop loyalty for the company and its products/services. The fact that logistics leverage may be difficult to duplicate enhances the possibility of building customer loyalty. THEORETICAL MODEL OF LOGISTICS LEVERAGE Figure 1-1 illustrates the potential drivers, facilitators, and outcomes of logistics leverage based on a review of the marketing and logistics literature. Several factors may influence the resources dedicated to the achievement of logistics leverage. Such drivers 16

30 Drivers Facilitators Outcomes O Corporate Strategy Market Orientation Logistics Functional Salience Logistics Information Technology Physical Resources Human Resources Strategic Alliances Logistics Performance Marketing Signals of Value Improved Firm Performance Sustainable Competitive Advantage Customer Satisfaction And Value Figure 1-1: Drivers, Facilitators, and Outcomes of Logistics Leverage include the corporate strategy of the firm, whether the firm is market oriented, and the importance of the logistics function within the organization (i.e., logistics functional salience (Zacharia 2001). In addition, there are facilitators that aid in the creation of logistics leverage. The facilitators include the infrastructure components as conceptualized by Mentzer and Williams (2001), logistics performance and marketing signals of value. Logistics leverage can result in outcomes for both the company and its customers. The facilitators and outcomes of logistics leverage are conceptualized into the relationships presented in Figure 1-2. The infrastructure components previously identified are incorporated into the model through process and value-added service capabilities, relational capabilities, and resource commitment. The potential drivers of 17

31 Resource Commitment Marketing Signals of Value Process Capabilities Logistics Performance Competitive Advantage Firm Performance Value-Added Service Capabilities Relational Capabilities Figure 1-2: A Process Model of Logistics Leverage logistics leverage are set aside for future research. At the heart of the model is logistics performance, which is defined as the efficiency, effectiveness, and differentiation of logistics processes. The realization of superior logistics performance is dependent upon the logistics capabilities of the firm and the resources that need to be dedicated to logistics processes. While achieving superior logistics performance in relation to the competition is proposed as a necessary component of logistics leverage, it is not the only component. To realize logistics leverage, the superior logistics performance has to be conveyed to customers through the firm s marketing efforts. Firms have to make customers aware of the superiority of its logistics processes over other firms. Thus, competitive advantage is 18

32 proposed to be greater for a company that has communicated its logistics capabilities through marketing signals of value. As suggested in Figure 1-1, the potential outcomes of achieving logistics leverage are improved firm performance and greater levels of customer satisfaction and value. Firms should be able to identify improved performance through measures such as reduced costs, improved service, and customers that are more loyal. Similarly, if a customer firm values the superior logistics capabilities of a firm with which it does business, it should be more satisfied with the benefits it receives from the relationship. Therefore, logistics leverage can be ascertained from the company or customer s perspective. The outcomes of logistics leverage considered in this study include firm performance indicators such as profitability, market share, and return on assets. Customer satisfaction and value are left to future research. STATEMENT OF PURPOSE Despite the amount of attention logistics has received as a potential competitive weapon, only one study has empirically examined the relationships among logistics capabilities, firm performance, and competitive advantage. Morash et al (1996) found a direct correlation between logistics capabilities (i.e., delivery speed, delivery reliability, responsiveness to target markets, and low cost distribution) and the performance outcomes related to the firm and to competitors. The majority of the work in this area has been normative in nature, identifying a need for a deeper theoretical foundation of how logistics can create a sustainable competitive advantage. Based on the lack of such 19

33 research in the logistics area, and the call for more research linking particular capabilities with competitive advantage, it was the overriding purpose of this study to develop and test a model of logistics leverage. This study developed measures of logistics leverage incorporating the components of the model as previously discussed. A second purpose of this study was to determine the specific infrastructure capabilities that lead to superior logistics performance. While Mentzer and Williams (2001) identified the infrastructure components through case studies, an in-depth analysis was warranted to narrow the categories and specifically identify relevant capabilities. Another purpose of this dissertation was to investigate the relationship between logistics performance and organizational (operational) performance. While studies have identified measures of logistics performance and operational performance, there is a need for more research that investigates the specific relationship between the two areas and the impact on competitive advantage. Finally, this dissertation sought to explore the relationship between the logistics and marketing areas of the firm. Specifically, the role the communication element of marketing strategy plays in the development of logistics leverage and a sustainable competitive advantage was examined. This research is important because it develops a method to quantify whether and to what degree a firm has logistics leverage in the marketplace. This research was guided by the following research question: How can the logistics leverage process be measured within an organization? Other secondary research questions were: 20

34 What are the capabilities or resources that influence the achievement of logistics leverage? What is the perceived value of logistics leverage to the organization? The primary outcome of this dissertation was to develop measures for logistics leverage and empirically test the achievement of logistics leverage from the company s perspective. The perspective of the customer was not examined in this study, but is suggested for future research. POTENTIAL CONTRIBUTIONS OF THIS RESEARCH This dissertation attempted to make several contributions to theory and research. The first contribution is the development and testing of the logistics leverage process model. It extends the logistics discipline s understanding of how logistics activities and processes can create a sustainable competitive advantage for the firm. In addition, it provides a means for assessing whether a firm has a sustainable competitive advantage based on logistics. A second contribution is the empirical testing of the theoretical assertion that valuable, rare, and inimitable resources create superior firm performance and competitive advantage. While research has examined such relationships based on the resource-based view of the firm, it has not considered them within the realm of logistics. The third contribution is the addition to the knowledge base on inter-functional relationships. Through an examination of the role of marketing in creating logistics leverage, insight can be gained into how marketing can facilitate the logistics leverage process. 21

35 Finally, managers will benefit from the study in several ways. In general, they can gain greater insight into how other areas of the organization, such as logistics, can create a sustainable competitive advantage. Through testing of the logistics leverage process model, evidence is provided as to the elements necessary to achieve logistics leverage. Another benefit is the understanding of how resources and capabilities may ultimately affect the achievement of logistics leverage. With this knowledge, managers can alter the manner in which resources are allocated to logistics and determine the logistics capabilities that need to be developed. Finally, this study demonstrates the importance of marketing in signaling the value that can be obtained through superior logistics systems and processes. ORGANIZATION OF THE DISSERTATION This dissertation is organized into five chapters. Chapter 1 provides the foundation for studying the process of logistics leverage. The theory of competitive advantage and the resource-based theory of the firm are discussed as antecedent justification for viewing logistics as a potential means for achieving competitive advantage. The various components of the logistics leverage process are introduced in the theoretical model. In addition, the chapter provides the statement of purpose, presents the potential theoretical and managerial contributions of the research, and outlines the organization of the dissertation. Chapter 2 presents the theoretical foundation for the logistics leverage model. In addition to a literature review on the various components of the model, in-depth 22

36 interviews with logistics professionals were conducted to build upon the information presented in the literature. Research hypotheses based on the relationships identified in the model are presented. Chapter 3 contains a discussion of the research methodology used to test the proposed model and associated hypotheses. Included are discussions on the research design, sample, measurement development, pretest procedures and results, and data analysis procedures. Chapter 4 provides an evaluation of the logistics leverage model and the results of hypotheses testing. Chapter 5 presents the conclusions based on the results of the hypotheses tests and structural equation modeling process. Theoretical and managerial implications as well as directions for future research are provided. 23

37 CHAPTER 2 - THEORY DEVELOPMENT The theoretical logistics leverage model presented in Chapter 1 has been theoretically grounded in the literature on competitive advantage, resource-based theory of the firm, and the integration of the logistics and marketing areas of the firm. The model is proposed to consist of several components, which when implemented together, provide firms with a means of creating a sustainable competitive advantage and enhancing firm performance. The objective of this chapter is to provide supporting information from the literature and in-depth personal interviews for the development of a testable logistics leverage model. The procedures for the qualitative investigation are presented first. This is followed by a discussion of the antecedent justification for the constructs in the model. The discussion of the constructs is organized according to whether they serve as facilitators or outcomes of the logistics leverage process. Hypotheses representing the proposed relationships between the relevant constructs are identified in Figure 2-1 and are presented throughout the chapter. QUALITATIVE INVESTIGATION As discussed in Chapter 1, the literature on the conceptual development of logistics leverage is limited to a few studies (Bowersox et al 1995; Mentzer and Williams 2001). The study by Mentzer and Williams (2001) was the only research found to qualitatively investigate through case studies the logistics leverage concept. Their definition of logistics leverage and the results of their study along with extant literature were used as the foundation for the development of the model in Figure

38 Resource Commitment ξ 1 H 1 Marketing Signals of Value η 2 H 6 Process Capabilities ξ 2 Value-Added Capabilities ξ 3 H 2 H 3 Logistics Performance η 1 H 9 Competitive Advantage η 2 H 7 H 5 H 8 Firm Performance η 3 Relational Capabilities ξ 4 H 4 Figure 2-1: The Logistics Leverage Conceptual Model While Mentzer and Williams (2001) identified resources such as technology, people, and facilities as well as strategic relationships as factors that can aid in the creation of logistics leverage, the interviews were used to verify these factors and identify other factors that might be important. Thus, an iterative process was utilized in which the interviews served as the catalyst for identifying relevant ideas which were then researched in the appropriate literature bases. All of the constructs in the model have been discussed in the literature to varying degrees; however, a few of the constructs (i.e., marketing signals of value and relational capabilities) have not been empirically tested and existing measures were not found. In addition, for purposes of this study, it was necessary to develop new measures for the resource commitment construct. The 25